Tax returns go from post office to digital

Apr. 14, 2014
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Turbo Tax app screen. / Turbo Tax

by Hadley Malcolm, USA TODAY

by Hadley Malcolm, USA TODAY

Corrections and clarifications: A previous version of this story misidentified Sue Brennan. She is a spokesperson for the United States Postal Service who handles operations issues.

April 15 will mark a digital first for Internal Revenue Service Commissioner John Koskinen. It will be the first year ever he won't be heading to the post office to drop off his tax return.

"I remember you just didn't want to be at the post office on the 14th or 15th," says Koskinen, 74, who took over as head of the IRS in December. "Now, whenever you're ready to file, you just file."

Koskinen has plenty of company. Electronic filing has overwhelmingly become the preferred method of completing tax returns. And so instead of receiving a hefty manila envelope from his tax preparer and heading to a downtown Washington, D.C., post office, Koskinen will complete the once arduous and stressful process in seconds with the click of a button.

Three decades ago, April 15 was like a marathon national block party. As millions of Americans swarmed post offices to file their tax returns at the eleventh hour, vendors handed out free coffee, IRS representatives were on hand to provide advice, and jazz bands sometimes set the mood. Lines lingered for hours, and branches stayed open past midnight to accommodate the overflow crowds.

But those days have faded into the realm of archaic, pre-Internet traditions; the yearly ritual of fingering through rumpled receipts and W2s has gradually experienced its digital awakening. This year, electronic filings are expected to reach 85% of total tax returns, "a new American record," Koskinen says.

At the start of the millennium, e-filing made up 23.5% of total tax returns, a little more than 30 million. By the end of 2014, the IRS expects that number to reach more than 125 million.

Even though electronic filing became available for the first time, though to a limited number of professionals, in 1986, it was 16 years before the process became entirely paperless. The transition since then has turned the cumbersome task into one that can be accomplished with the click, or tap, of a button. And it's significantly cheaper. In 2011, the most recent year for which the IRS has data, e-filing cost the agency 15 cents to process; paper returns cost $3.50. Plus, e-file has cut down on mistakes, the IRS says. The error rate associated with e-filed returns is 1%, compared with a nearly 20% error rate for paper returns.

Paying the government in taxes you owe no longer requires sending a check either - although it's still an option. The IRS offers several online payment systems.

But when the Internet was first gaining traction, "it was almost as if you were kind of going rogue if you filed electronically," says Sue Brennan, a spokesperson for the United States Postal Service. She remembers when many Americans were skeptical of Internet security and would never have trusted it with something as important, and personal, as the documents involved in filing taxes.

So what changed? "It became easy," Brennan says. Eventually, as with most things in the Internet age, convenience won. And technology became sophisticated enough to ensure security.

Refunds now come within weeks, not months - the IRS tries to issue them within 21 days. And manila envelopes full of tax documents no longer travel through the postal service, often making multiple trips, between individuals and their tax preparers; instead they're electronically dropped onto cyber portals in a matter of minutes.

Brennan personally filed online for the first time in 2002. But as a clerk at the Merrifield, Va., post office and sorting facility in the Washington suburbs in the early 1990s, she remembers lines of cars forming on the streets while postal service employees walked around with large bins on April 15, creating a makeshift tax return drive-through. At other locations across the country, vendors sold food and coffee, bands played and IRS officials were on hand to help people finish their forms.

"It was very festive," Brennan says. "April 15 used to be a major postal event across the country. At least in the last 10 years for sure, it's all but gone away."

Overall, yearly single-piece first-class mail volume, which includes tax returns, has declined nearly 60% since 1999, according to USPS data. This year, the Merrifield office will close at its normal time, 8 p.m., on tax day - though some larger offices across the country still stay open until midnight.

Don Mingo, a 57-year-old pastor from Grand Rapids, Minn., will wake up to another regular Tuesday; he and his wife filed their return weeks ago and already received their refund. They're using it to go on a vacation to visit their grandchildren. Michael Brooke-Gay, a high school chemistry teacher, did his and his wife's taxes on his iPad two months ago in the span of about four hours.

Mingo remembers spending months mailing tax forms back and forth to his tax preparer in the 1990s. If something was missing or needed clarification, his tax preparer would send the forms back. Mingo would have to identify the correct form or furnish the missing information and put the packet back in the mail.

"It was a nightmare," he says. "More than once we needed an extension because we ran out of time."

For the past two years, Brooke-Gay, who turns 30 on Monday and lives in Hilton, N.Y., has used his iPad to file his taxes with the TurboTax app. He even calls the experience enjoyable.

"I actually almost trusted the iPad experience more because it was all self-contained in the app," he says. "The website gets kind of cluttered because there's different advertisements."

H&R Block and TurboTax both provide smartphone apps that allow users to file by taking pictures of their W2s. The tax forms automatically fill in based on the image. Tablets have also become an increasingly popular way of completing at least some of the filing process.

Last year, H&R Block noticed a significant increase in the number of people using a combination of phones, tablets and desktop computers to prepare their returns. So this year the company overhauled all 6,000 pages of its website so that the content could shrink or grow to fit the screen of any device.

"We're seeing explosive growth in the number of people who use their tablet as an extension of the experience," says Jason Houseworth, president of global digital tax software at H&R Block.

The one thing the move to digital filing hasn't changed: the need for professional tax help. Thanks to a tax code that only seems to grow in complexity, the split between those who seek help and those who file on their own has remained around 60/40 for the past decade, Houseworth says.

Lonnie Gary, a partner at the CPA firm Young, Craig & Co., in Mountain View, Calif., says the firm has gained clients at a rate of 1% to 2% a year in the past five years, chalking it up to a tax code that's "too complicated." Even so, the process has been stripped of many of its time-consuming moments.

When Gary needed to fill out an uncommon tax form for a client while working for H&R Block in the late 1980s, he had to Xerox it from a massive book of forms, then fill it out by hand with a pencil. Now, he has clients submit documents through a cyber portal and e-files with the IRS through his company's tax software.

Still, it seems no amount of technological ease can alleviate the dread of tax season for the majority of Americans.

"It doesn't change the need of the assisted filer," Houseworth says. "Regardless of the amount of technology, they still are frightened by taxes and have no interest in doing them."